The Effectiveness of Position Limits: Evidence from the Foreign Exchange Futures Markets

다국어 초록 (Multilingual Abstract)

To test the effectiveness of position limits, this study examines the impact of the relative size of hedger and speculator open interests on the price discovery process in both JPY-USD and EUR-USD futures markets. Hedging trading has a negative impact, regardless of its size, on price discovery in futures markets. Hedgers are less likely to be information motivated, so their trading uniformly delays the price discovery process. However, there is a positive and nonlinear impact of speculators’ trade size on price discovery, the contribution of which depends on the relative size of the speculative open interest. Contrary to conventional wisdom among regulators, speculative trading does not harm the market in terms of price discovery; more important, as long as speculative trading is lower than an endogenously determined threshold, it even improves futures market efficiency.

목차 (Table of Contents)

• Abstract
• 1. Introduction
• 2. Data
• 3. Methodology
• 3.1. Information shares
• 3.2. Logistic smooth transition regression (LSTR) model
• 3.3. Empirical models
• 4. Empirical Results
• 4.1 Impact of hedger trading positions on price discovery
• 4.2 Impact of speculators’ trading positions on price discovery
• 5. Conclusions
• References
• Table
• Appendix